In an earlier post (Dec. 16, 2015), we discussed how enforcement actions are a tremendously valuable resource for determining the parameters of current law and best practices. As reported in the Wall Street Journal, Michael Dondarski, the chief of regulated industries, oversight and evaluation at Treasury’s Office of Foreign Assets Control, recently said that OFAC’s enforcement actions are tools from which financial institutions can learn. “We assume industry reads our enforcement actions,” he said. They are “our way to teach lessons,” said Mr. Dondarski, who noted that the enforcement actions often contain tips to the sector on what type of misconduct they’re looking out for as well as enforcement priorities.
While Mr. Dondarski’s was speaking about OFAC enforcement actions, his statement serves to reinforce the need for investment advisers to continuously review SEC enforcement actions. There are two types of SEC enforcement actions:
In a civil action, the SEC files a complaint with a U.S. District Court and asks the court for a sanction or remedy. Often the SEC asks for a court order, called an injunction, that prohibits any further acts or practices that violate the law or SEC rules. An injunction can also require audits, accounting for frauds, or special supervisory arrangements. In addition, the SEC can seek civil monetary penalties, or the return of illegal profits (called disgorgement). The court may also bar or suspend an individual from serving as a corporate officer or director. A person who violates the court’s order may be found in contempt and be subject to additional fines or imprisonment.
The SEC can seek a variety of sanctions through the administrative proceeding process. Administrative proceedings differ from civil court actions in that they are heard by an administrative law judge, who is independent of the SEC. The administrative law judge presides over a hearing and considers the evidence presented by the Division staff, as well as any evidence submitted by the subject of the proceeding. Following the hearing the administrative law judge issues an initial decision that includes findings of fact and legal conclusions. The initial decision also contains a recommended sanction. Both the Division staff and the defendant may appeal all or any portion of the initial decision to the SEC. The SEC may affirm the decision of the administrative law judge, reverse the decision, or remand it for additional hearings. Administrative sanctions include cease and desist orders, suspension or revocation of broker-dealer and investment advisor registrations, censures, bars from association with the securities industry, civil monetary penalties, and disgorgement.
Last year alone, the SEC issued over 1300 individual enforcement actions. Fortunately, CCO Companion’s compliance professionals read each and every one of these enforcement actions and found the select few that were relevant to investment advisers. These are the enforcement actions that touch upon everyday investment adviser conduct and explain how such conduct violated the Investment Advisers Act. CCO Companion does not include out-and-out fraud actions as there is nothing to glean from these types of cases other than it is wrong to commit fraud and you will most likely be cast, prosecuted and thrown in jail (there, lesson learned).